In the United States, exchange-trading of options has existed in a standardized, regulated marketplace since the 1970's. An option is essentially a contract giving a buyer the right, but not the obligation, to buy or sell shares of an underlying security at a specific price for a specific time. Since the 1970's a number of exchanges have been formed, including the Chicago Board Options Exchange (the “CBOE”), the American Stock Exchange (the “AMEX”), the Pacific Stock Exchange (the “PCSE”), the International Securities Exchange (the “ISE”), and the Philadelphia Stock Exchange (the “PHLX”). In general terms, four specifications describe an options contract: the type of the option (e.g., a put or a call), the premium (or the initial amount paid on the contract), the underlying security (or the security, such as an equity, which must be delivered or purchased if the option is exercised), and a contract expiration date. As is the case for other types of market-traded securities such as stocks and bonds, a customer's order to buy or sell options may be a “market order” or a “limit order”. A market order does not specify the desired price, but rather obligates the broker to obtain the best available price as determined by market conditions. A limit order specifies the price (the “limit price”) at which the customer desires the transaction to be executed, and obligates the broker to execute the transaction at the specified price or better if market conditions allow, and not to execute the transaction if market conditions do not allow execution at the specified price.
An order to buy or sell options typically also specifies the number of contracts to be bought or sold. In the case of a limit order, a “partial fill” occurs when it is possible to execute at the limit price some portion but less than all of the number of contracts specified in the limit order.
Unlike other exchange-traded securities, which can generally be traded on equal terms at any exchange, many options trade differently at different exchanges. The variations can include differences in price, execution time, liquidity, etc. For example, an option whose underlying security is IBM Corp. stock may be traded on several exchanges. However, at any given time, there may be slightly different order pricing and execution characteristics associated with trades at different exchanges. Because the various options trading exchanges are not linked, situations known as “trade-throughs” and “trade-ats” may occur. In these situations a limit order remains unfilled at one exchange, even though a transaction occurred at another exchange at a better or equal price.
In the future, it is possible that each of the different exchanges will enter into linkage agreements; but until then this fragmented market continues to make it difficult for options customers to obtain best execution of their orders and to assess the performance of their brokers in executing their orders. It would be desirable to provide a system to monitor and evaluate trading activity in option limit orders which overcomes deficiencies associated with existing trading systems.